All Signs Point to Higher Interest Rates

On Friday the Bureau of Labor Statistics will release one more monthly employment market report ahead of the mid-December Federal Open Market Committee meeting that might finally pull the trigger on higher interest rates. Will it be particularly important in the decision-making deliberations of the committee? They aren’t telling, but it’s likely that a positive report (like October’s) will help smooth things along. But even a less positive report might not be able to derail the vote to raise rates. It’s only one report, after all, and the Fed has always asserted that it considers a range of data in its deliberations. Besides, the momentum is there for a rate hike, and all that implies for borrowers (such as most anyone doing a real estate deal).

For example, Fed Chair Janet Yellen, speaking at the Economic Club of Washington on Wednesday, was as optimistic about the U.S. economy as her position allows: “I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labor market slack, and a rise in inflation to our 2 percent objective… the fundamental factors supporting domestic spending that I have enumerated today will continue to do so, while the drag from some of the factors that have been weighing on economic growth should begin to lessen next year.”

Later in the speech, Yellen argued that sooner might be better than later when it comes to interest rate increases. Were the FOMC to delay the start of policy normalization for too long, she said, it would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting—to prevent a bubble of an economy, in other words, something the Fed missed the last time around in the mid-2000s. “Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession,” Yellen added. “Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.”

The Fed also released the latest Beige Book on Wednesday, which noted that the 12 Federal Reserve District reports indicate that economic activity increased at a “modest pace” in most regions of the country since the previous Beige Book. Whether that’s better or worse than a “moderate” pace isn’t all together clear, but in any case, things are still looking up. Housing markets grew at a “moderate pace” on balance, and home prices also “increased modestly” since the previous book, the report noted. Likewise, commercial development and leasing grew at “modest” and “moderate” rates, respectively, according to the Beige Book. In most contexts, moderate and modest might not be all that exciting, but in Fed terms it probably points to the likelihood that money will cost a little bit more, and soon.